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Khosla Biofuel IPO Draws Doubters

As yet another biofuels company prepares for a stock offering, some wonder if the company is worthy of going public at all.

In 2004, a startup called Nanosys tried to go public. It had recruited some of the world’s top nanoscientists for its board and had bought up hundreds of nanotech patents. The idea was that it could revolutionize TV displays, batteries, and maybe even golf balls. It had no product, but so what? Nanotech seemed like it could change everything.

Future fuel: KiOR’s demonstration facility just outside of Houston, Texas, produces up to 15 barrels of renewable crude oil per day from wood chips.

That is when a venture capitalist named Vinod Khosla, then with Kleiner, Perkins, Caufield & Byers, cried fraud. A speech of Khosla’s at Stanford University helped to not only torpedo the Nanosys IPO but also burst a short-lived nanotech bubble.

Here’s what Khosla said, according to a Thomson Reuters publication, at the time: “Personally, I think it is the wrong model for a company, and I think it is a shame that they are going public, because I do not think they are in a position to be predictable enough. And whether they are doing it knowingly or unknowingly, there is a reasonable likelihood that they will defraud the public market.”

Now Khosla’s the one being questioned. “I am looking at Vinod Khosla’s S-1 filing of KiOR, which has a grand total of zero ($0) revenue,” wrote venture capitalist Larry Bock in an e-mail. Bock cofounded Nanosys and was behind the aborted IPO. “Should Vinod be kept accountable?”

For several years, Khosla Ventures has been plowing money into green-energy startups. Now Khosla has begun cashing out by pushing some of his next-generation biofuels companies public. Recent Khosla-backed biofuels IPOs include Amyris and Gevo, and now comes KiOR—a Pasadena, Texas, company that says it will turn wood chips into gasoline and diesel. It expects to raise $100 million in its IPO.

All three companies are early-stage. They’re still building plants and proving their ideas. None have turned a profit. KiOR may be the earliest-stage yet. Its SEC filing is long on PowerPoint slogans (“We Drilled Deep Into the Problem … Not Into Our Planet”) but so far KiOR hasn’t sold a drop of fuel and cautions investors that “we have no experience producing renewable transportation fuels at the scale needed for the development of our business.” The company says it is counting on a $1 billion loan guarantee from the U.S. Department of Energy to build its plants.

Bock now says he wants some “intellectual honesty” from his rival.

So Technology Review asked Khosla whether pre-revenue biofuels companies should be going public. Khosla sent back a detailed memo explaining why biofuels is not like nanotech. Here’s a summary:

Existing markets: Biofuels are end applications with large markets, not just technologies.

Proven technology: In many cases the manufacturing or yield of technology has been proven.

Big payoffs: The payback from success is huge. That was not always true in biotech and nanotech, where there is more risk from competitors. In biofuels, the markets are so huge that if 10 companies produced the same product, each could be a billion-dollar business without interfering with the others.

Predictability: If a company can give investors accurate expectations for the next two to three years, then they can consider an IPO. This is true of biofuels now but not of nanotech in 2004.

Khosla’s main point is that the fuels market is gigantic, whereas Nanosys was all about technologies looking for problems to solve. He argues that having interesting technology without a compelling market is not a good place to be as a business. Even Nanosys’s current chief financial officer, John Page, agrees with that. “That is a fairly accurate assessment of where Nanosys was in 2004.” Nanosys recently reorganized in an effort to generate more revenue from LEDs and batteries.

Even so,  KiOR is more of a business plan than a business. And its biggest asset may be the Khosla brand itself. Khosla Ventures has put money in over 40 clean-tech companies and raised over $1 billion for its latest investment fund.

For investors, evaluating biofuel projects can be tricky. Everything depends on whether the technology succeeds in turning feedstock into fuel in an economical way. KiOR estimates its own production costs for gasoline at around $1.80 a gallon. But advanced biofuel companies are notorious for being overly optimistic on costs based on small-scale production. Another Khosla company, Range Fuels, ran into trouble at the scale-up phase.

Khosla says it’s up to investors to make the call about whether any company’s forecasts make sense. “What you believe will determine the valuation you assign to a company, and if you are optimistic, you will get to frothy valuations and hence take on undue risk,” he says.

So far, investors aren’t complaining. Khosla has already notched two successes. Both Amyris and Gevo saw big jumps in their stock prices. “Those are good returns, and that drives the market for more offerings,” says Sheeraz Haji, CEO of market analyst Cleantech Group. “There is a belief that these are huge markets and that these companies are going to do well.”

Pavel Molchanov, an analyst at financial services provider Raymond James, says there’s room for even more stock offerings. “Conceptually, the market has signaled an openness to consider these companies. I think the fact that we are talking about oil at $110 a barrel provides a very helpful market backdrop,” he says. “If oil was at $30, we wouldn’t be seeing these IPOs.”

Still, it’s fair to wonder if the Khosla IPO machine might overheat. Last year, investors were not interested in the $200 million IPO plans of PetroAlgae, another company with no revenue. And shares of synthetic biology company Codexis haven’t done well. In addition to KiOR, the fuel-from-algae company Solazyme has now filed documents with the SEC for a planned $100 million IPO. Solazyme doesn’t yet manufacture fuels economically, but it’s launched a cosmetics business using its oils.

The nanotech crowd insists that this biofuels boom is hype driven by government subsidies, sexy science, and high oil costs. Josh Wolfe, a managing partner at Lux Capital, where Bock is also a venture investor, argues that “biofuels will turn most investors into biofools. Some of these IPOs are over-promoted and not good businesses. For society it may turn out okay, but investors will surely be left holding the bag.”

We put it to Khosla—is there an IPO bubble in next-generation biofuels? “I am sure a potential for a bubble exists, and we should be careful,” Khosla says. “Whenever quick money can be made, you will see bubbles form.”

The original version of this article contained an anonymous quote that didn’t meet Technology Review’s fairness standards.

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